African Perspectives on Sovereign Debt Restructuring

Wednesday, August 6, 2014 - 7:00 PM

Lake Victoria Serena Resort, Kampala, Uganda

CIGI, in partnership with the Uganda Debt Network, is hosting a conference exploringAfrican perspectives on sovereign debt restructuring. It will feature senior policy makers from finance ministries and central banks, academics, as well as civil society representatives from Cameroon, Côte d’Ivoire, Ghana, Liberia, Nigeria, Republic of Congo, Tanzania, Uganda, Zambia and Zimbabwe. Conference proceedings will be in English only.

Conference sessions will explore African countries’ interests, concerns and insights regardingthe build-up and resolution of sovereign debt in the global economy, the prospect of future sovereign debt crises and the implications of rising government debt levels in advanced economies. The conference will discuss new proposals for handling sovereign debt restructurings that have been advanced in the wake of the Eurozone crisis, and will aim to assess new institutional arrangements for managing large-scale sovereign debt restructurings. This conference is also the first step in a broader global initiative that CIGI is spearheading, the first-ever global consultations on sovereign debt restructuring, gathering analyses and perspectives from different regions. The African continent is an apt starting place. African countries need to be heard much more in the global sovereign debt debates. The results of this conference should provide the international policy community with new insights and possible lessons underscoring the voice of African countries in the current debate.

Session I: Is the International Debt Architecture in Need of Fundamental Reform?

This session will focus on the pros and cons of reforming the current approach to sovereign debt restructuring. Many commentators argue that sovereign debt restructurings are too costly and that new mechanisms are needed to facilitate more timely, orderly and fair restructurings. They maintain that the creation of appropriate mechanisms will help to eliminate creditor moral hazard and the efficiency losses associated with debt restructuring. Others, however, argue that sovereign debt restructuring is supposed to be costly, and that any mechanisms to reduce this cost will also make restructurings more frequent and will raise the cost of borrowing for sovereign debtors. What are the advantages and disadvantages of reforming the international debt architecture?

The literature on sovereign defaults and debt restructurings illustrates how a lack of coordination among creditors and a lack of information among/between creditors and debtors can delay necessary restructurings and postpone a country’s return to economic health. The literature also highlights how the lack of a credible commitment (during normal times) to restructure unsustainable debt can encourage the type of over-lending and over-borrowing that leads to sovereign debt crises in the first place. Are these problems familiar to the African experience? Are there other problems with sovereign debt and sovereign debt restructuring that are more relevant to the African experience generally or to your country’s experience specifically? Do HIPC initiative restructurings differ from restructurings during a sovereign debt crisis? What are the key lessons to draw from your experience with sovereign debt restructuring?

This session will focus on the evolving debate on how best to govern sovereign debt restructuring. Over the last decade, this debate has become increasingly polarized between two alternative approaches to restructuring: the market-based contractual approach of collective action clauses (CACs); and the treaty-based statutory approach of an international bankruptcy regime. How can African perspectives inform this debate? Are CACs the only practical approach? Does a statutory approach — such as the sovereign debt restructuring mechanism (SDRM) proposed by the IMF in 2001 — protect debtor interests better than CACs? How would a statutory approach affect borrowing costs for African countries? How does Africa’s current position within the global economy and global economic governance institutions, as well as some countries’ history with odious debt, shape its preferences for a particular approach to sovereign debt restructuring?

Since the onset of the euro-zone crisis, a number of new proposals for handling sovereign debt restructuring have also been put forward. These proposals — such as the creation of a semi-formal Sovereign Debt Forum or the creation of sovereign contingent convertible (coco) bonds and GDP-linked bonds — represent innovative hybrid approaches that do not fit cleanly into the statutory-versus-contractual dichotomy. What do delegates think about these new prospective approaches? Do they improve upon CACs? Are they more politically feasible than a statutory sovereign bankruptcy regime? Do these proposals strike an appropriate balance between creditor and debtor interests?

Session III: Equity and the Ethics of Sovereign Debt and Sovereign Debt Restructuring

This session will focus on fairness and the distributional implications of sovereign debt restructuring. Although it is often written and spoken about in technical language, sovereign debt restructuring is in fact a very politically charged issue, wrapped up in personal judgements about equity and the appropriate balance of public-private burden sharing during financial crises. On one hand, many private sector representatives and free-market advocates oppose sovereign debt restructuring because it represents a redistribution of capital from creditors (often private) to debtors (public). On the other hand, private losses that generate financial crises are often socialized and borne by the public sector, representing a large redistribution of pain from private financial actors to the population writ large. Furthermore, when the IMF and bilateral official creditors bail-out countries with sovereign debt problems, domestic populations are often left to bear the brunt of the crisis (for example, through austerity measures), while the country’s international private creditors remain unscathed. For many, this is a deeply unfair distribution of the costs and benefits of sovereign debt and sovereign debt crises.

Drawing on African countries’ experiences, what are the different distributional concerns that arise from sovereign debt and sovereign debt restructuring? What is the best way to balance these different concerns? Should the interests of some groups (such as creditors, debtors, citizens) be privileged over the interests of others? Are lenders and borrowers equally (or differentially) responsible for the buildup of unsustainable debt? What does that imply for burden sharing in resolution of sovereign debt crises?

Session IV: Governing Sovereign Debt: What’s at Stake for Africa?

This session will focus on African countries’ interests and concerns regarding the buildup and resolution of sovereign debt in Africa and in the global economy more generally. In Africa, there have been significant new developments in sovereign borrowing; most notably, many African countries are increasingly looking to private international capital markets, rather than other governments, for their financing needs — a development that carries both opportunities and risks. Outside of Africa, there are a number of heavily indebted countries whose debt difficulties could have international ramifications that affect Africa (and other continents). From these observations, several questions arise.

For African countries, what are the main opportunities and challenges of borrowing from international capital markets? Is there a risk that the US Federal Reserve’s “tapering” of its quantitative easing program will put upward pressure on African borrowing costs? What are African countries’ main concerns regarding sovereign debt and the prospect of future sovereign debt crises (reduced demand for African exports, a freezing of international capital flows, intergenerational equity, fairness of IMF treatment)? What interest do African countries have in reforming the institutional arrangements (such as London Club, Paris Club, CACs, IMF programs and others) that govern sovereign debt? What are the implications of such reform? What is an appropriate and fair role for the IMF in sovereign debt crises?

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